AlterNet.org: James K. Galbraith http://www.alternet.org/authors/james-k-galbraith
enJames K. Galbraith Takes on Thomas Piketty's "Capital in the Twenty-First Century"http://www.alternet.org/economy/james-k-galbraith-takes-thomas-pikettys-capital-twenty-first-century
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<div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">The book has set the progressive world on fire. But is Piketty right?</div></div></div><!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers -->
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<!--smart_paging_autop_filter--> <p>What is “capital”? To Karl Marx, it was a social, political, and legal category—the means of control of the means of production by the dominant class. Capital could be money, it could be machines; it could be fixed and it could be variable. But the essence of capital was neither physical nor financial. It was the power that capital gave to capitalists, namely the authority to make decisions and to extract surplus from the worker.</p><p>Early in the last century, neoclassical economics dumped this social and political analysis for a mechanical one. Capital was reframed as a physical item, which paired with labor to produce output. This notion of capital permitted mathematical expression of the “production function,” so that wages and profits could be linked to the respective “marginal products” of each factor. The new vision thus raised the uses of machinery over the social role of its owners and legitimated profit as the just return to an indispensable contribution.</p><p>Symbolic mathematics begets quantification. For instance, if one is going to claim that one economy uses <em>more</em> capital (in relation to labor) than another, there must be some common unit for each factor. For labor it could be an hour of work time. But for capital? Once one leaves behind the “corn model” in which capital (seed) and output (flour) are the same thing, one must somehow make commensurate all the diverse bits of equipment and inventory that make up the actual “capital stock.” But how?</p><p>Although Thomas Piketty, a professor at the Paris School of Economics, has written a massive book entitled <em>Capital in the Twenty-First Century</em>, he explicitly (and rather caustically) rejects the Marxist view. He is in some respects a skeptic of modern mainstream economics, but he sees capital (in principle) as an agglomeration of physical objects, in line with the neoclassical theory. And so he must face the question of how to count up capital-as-a-quantity.</p><p>His approach is in two parts. First, he conflates physical capital equipment with <em>all</em> forms of money-valued wealth, including land and housing, whether that wealth is in productive use or not. He excludes only what neoclassical economists call “human capital,” presumably because it can’t be bought and sold. Then he estimates the market value of that wealth. His measure of capital is not physical but financial.</p><p>This, I fear, is a source of terrible confusion. Much of Piketty’s analysis turns on the ratio of capital—as he defines it—to national income: the capital/income ratio. It should be obvious that this ratio depends heavily on the flux of market value. And Piketty says as much. For example, when he describes the capital/income ratio plummeting in France, Britain, and Germany after 1910, he is referring only in part to physical destruction of capital equipment. There was almost no physical destruction in Britain during the First World War, and that in France was vastly overstated at the time, as Keynes showed in 1919. There was also very little in Germany, which was intact until the war’s end.</p><p>So what happened? The movement of Piketty’s ratio was largely due to much higher incomes, produced by wartime mobilization, in relation to the existing market cap, whose gains were restricted or fell during and after the war. Later, when asset values collapsed during the Great Depression, it mainly wasn’t physical capital that disintegrated, only its market value. During the Second World War, destruction played a larger role. The problem is that while physical and price changes are obviously different, Piketty treats them as if there were aspects of the same thing.</p><blockquote class="pull"><p>The evolution of inequality is not a natural process.</p></blockquote><p>Piketty goes on to show that in relation to current income, the market value of capital assets has risen sharply since the 1970s. In the Anglo-American world, he calculates, this ratio rose from 250–300 percent of income at that time to 500–600 percent today. In some sense, “capital” has become more important, more dominant, a bigger factor in economic life.</p><p>Piketty attributes this rise to slower economic growth in relation to the return on capital, according to a formula he dubs a “fundamental law.” Algebraically, it is expressed as r&gt;g, where r is the return on capital and g is the growth of income. Here again, he <em>seems</em> to be talking about physical volumes of capital, augmented year after year by profit and saving.</p><p>But he isn’t measuring physical volumes, and his formula does not explain the patterns in different countries very well. For instance, his capital-income ratio peaks for Japan in 1990—almost a quarter century ago, at the start of the long Japanese growth slump—and for the United States in 2008. Whereas in Canada, which did not have a financial crash, it’s apparently still rising. A simple mind might say that it’s market value rather than physical quantity that is changing, and that market value is driven by financialization and exaggerated by bubbles, rising where they are permitted and falling when they pop.</p><p>Piketty wants to provide a theory relevant to growth, which requires physical capital as its input. And yet he deploys an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says. He merely asserts that the return on capital has usually averaged a certain value, say 5 percent on land in the nineteenth century, and higher in the twentieth.</p><p>The basic neoclassical theory holds that the rate of return on capital depends on its (marginal) productivity. In that case, we must be thinking of physical capital—and this (again) appears to be Piketty’s view. But the effort to build a theory of physical capital with a technological rate-of-return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s, notably Joan Robinson, Piero Sraffa, and Luigi Pasinetti.</p><p>Piketty devotes just three pages to the “Cambridge-Cambridge” controversies, but they are important because they are wildly misleading. He writes:</p><blockquote><p>Controversy continued . . . between economists based primarily in Cambridge, Massachusetts (including [Robert] Solow and [Paul] Samuelson) . . . and economists working in Cambridge, England . . . who (not without a certain confusion at times) saw in Solow’s model a claim that growth is always perfectly balanced, thus negating the importance Keynes had attributed to short-term fluctuations. It was not until the 1970s that Solow’s so-called neoclassical growth model definitively carried the day.</p></blockquote><p>But the argument of the critics was not about Keynes, or fluctuations. It was about the concept of physical capital and whether profit can be derived from a production function. In desperate summary, the case was three-fold. First: one <em>cannot</em> add up the values of capital objects to get a common quantity without a prior rate of interest, which (since it is prior) must come from the financial and not the physical world. Second, if the actual interest rate is a financial variable, varying for financial reasons, the <em>physical</em> interpretation of a dollar-valued capital stock is meaningless. Third, a more subtle point: as the rate of interest falls, there is no systematic tendency to adopt a more “capital-intensive” technology, as the neoclassical model supposed.</p><p>In short, the Cambridge critique made meaningless the claim that richer countries got that way by using “more” capital. In fact, richer countries often use <em>less</em> apparent capital; they have a larger share of services in their output and of labor in their exports—the “Leontief paradox.” Instead, these countries became rich—as Pasinetti later argued—by learning, by improving technique, by installing infrastructure, with education, and—as I have argued—by implementing thoroughgoing regulation and social insurance. None of this has <em>any</em> necessary relation to Solow’s physical concept of capital, and still less to a measure of the capitalization of wealth in financial markets.</p><p>There is no reason to think that financial capitalization bears any close relationship to economic development. Most of the Asian countries, including Korea, Japan, and China, did very well for decades without financialization; so did continental Europe in the postwar years, and for that matter so did the United States before 1970.</p><p>And Solow’s model did <em>not</em> carry the day. In 1966 Samuelson conceded the Cambridge argument!</p><p align="center"><strong>2.</strong></p><p>The empirical core of Piketty’s book is about the distribution of income as revealed by tax records in a handful of rich countries—mainly France and Britain but also the United States, Canada, Germany, Japan, Sweden, and some others. Its virtues lie in permitting a long view and in giving detailed attention to the income of elite groups, which other approaches to distribution often miss.</p><p>Piketty shows that in the mid-twentieth century the <em>income</em>share accruing to the top-most groups in his countries fell, thanks mainly to the effects and after-effects of the Second World War. These included unionization and rising wages, progressive income tax rates, and postwar nationalizations and expropriations in Britain and France. The top shares remained low for three decades. They then rose from the 1980s onward, sharply in the United States and Britain and less so in Europe and Japan.</p><p>Wealth concentrations seem to have peaked around 1910, fallen until 1970, and then increased once again. If Piketty’s estimates are correct, top wealth shares in France and the United States remain today below their Belle Époque values, while U.S. top income shares have returned to their values in the Gilded Age. Piketty also believes the United States is an extreme case—that income inequality here today exceeds that in some major developing countries, including India, China, and Indonesia.</p><p>How original and how reliable are these measures? Early on, Piketty makes a claim to be the sole living heir of Simon Kuznets, the great midcentury scholar of inequalities. He writes:</p><blockquote><p>Oddly, no one has ever systematically pursued Kuznets’s work, no doubt in part because the historical and statistical study of tax records falls into a sort of academic no-man’s land, too historical for economists and too economistic for historians. That is a pity, because the dynamics of income inequality can only be studied in a long-run perspective, which is possible only if one makes use of tax records.</p></blockquote><p>The statement is incorrect. Tax records are <em>not</em> the only available source of good inequality data. In research over twenty years, this reviewer has used <em>payroll</em> records to measure the long-run evolution of inequalities; in a paper published back in 1999, Thomas Ferguson and I tracked such measures for the United States to 1920—and we found roughly the same pattern as Piketty finds now.<a href="http://www.dissentmagazine.org/article/kapital-for-the-twenty-first-century#footnote1" id="footnote_ref1">*</a></p><p>It is good to see our results confirmed, for this underscores a point of great importance. The evolution of inequality is not a natural process. The massive equalization in the United States between 1941 and 1945 was due to mobilization conducted under strict price controls alongside confiscatory top tax rates. The purpose was to double output without creating wartime millionaires. Conversely, the purpose of supply-side economics after 1980 was (mainly) to enrich the rich. In both cases, policy largely achieved the effect intended.</p><p>Under President Reagan, changes to U.S. tax law encouraged higher pay to corporate executives, the use of stock options, and (indirectly) the splitting of new technology firms into separately capitalized enterprises, which would eventually include Intel, Apple, Oracle, Microsoft, and the rest. Now, top incomes are no longer fixed salaries but instead closely track the stock market. This is the simple result of concentrated ownership, the flux in asset prices, and the use of capital funds for executive pay. During the tech boom, the correspondence between changing income inequality and the NASDAQ was exact, as Travis Hale and I show in a paper just published in the <em>World Economic Review</em>.</p><p>The lay reader will not be surprised. Academics, though, have to contend with the conventionally dominant work of (among others) Claudia Goldin and Lawrence Katz, who argue that the pattern of changing income inequalities in America is the result of a “race between education and technology” when it comes to wages, with first one in the lead and then the other. (When education leads, inequality supposedly falls, and vice versa.) Piketty pays deference to this claim but he adds no evidence in favor, and his facts contradict it. The reality is that wage structures change far less than profit-based incomes, and most of increasing inequality comes from an increasing flow of profit income to the very rich.</p><p>In global comparison, there is a good deal of evidence, and (so far as I know) none of it supports Piketty’s claim that U.S. income today is more unequal than in the major developing countries. Branko Milanović identifies South Africa and Brazil as having the highest inequalities. New work from the Luxembourg Income Study (LIS) places Indian income inequality well above that in the United States. My own estimates place United States inequality below the non-OECD average, and my estimates agree with those of the LIS on India.</p><p>A likely explanation for the discrepancies is that income tax data are only as comparable as legal definitions of taxable income permit, and only as accurate as tax systems are effective. Both factors become problematic in developing countries, so that income tax data will not capture the degree of inequalities that other measures reveal. (And of oil sheikhdoms where income goes untaxed, nothing can be learned.) Conversely, good tax systems reveal inequality. In the United States, the IRS remains feared and respected, an agency to which even the wealthy report, for the most part, most of their income. Tax records are useful but it is a mistake to treat them as holy writ.</p><p align="center"><strong>3.</strong></p><p>To summarize so far, Thomas Piketty’s book about capital is neither about capital in the sense used by Marx nor about the physical capital that serves as a factor of production in the neoclassical model of economic growth. It is a book mainly about the <em>valuation</em> placed on tangible and financial assets, the <em>distribution</em> of those assets through time, and the <em>inheritance</em> of wealth from one generation to the next.</p><p>Why is this interesting? Adam Smith wrote the definitive one-sentence treatment: “Wealth, as Mr. Hobbes says, is power.” Private financial valuation measures power, including political power, even if the holder plays no active economic role. Absentee landlords and the Koch brothers have power of this type. Piketty calls it “patrimonial capitalism”—in other words, not the real thing.</p><blockquote class="pull"><p>The old system of high marginal tax rates was effective in its time. But would it work to go back to that system now? Alas, it would not.</p></blockquote><p>Thanks to the French Revolution, registry of wealth and inheritance has been good in Piketty’s homeland for a long time. This allows Piketty to show how the simple determinants of the concentration of wealth are the rate of return on assets and the rates of economic and population growth. If the rate of return exceeds the growth rate, then the rich and the elderly gain in relation to everyone else. Meanwhile, inheritances depend on the extent to which the elderly accumulate—which is greater the longer they live—and on the rate at which they die. These two forces yield a flow of inheritances that Piketty estimates to be about 15 percent of annual income presently in France—astonishingly high for a factor that gets no attention at all in newspapers or textbooks.</p><p>Moreover, for France, Germany, and Britain, the “inheritance flow” has been rising since 1980, from negligible levels to substantial ones, due to a higher rate of return on financial assets along with a slightly rising mortality rate in an older population. The trend seems likely to continue—though one wonders about the effect of the financial crisis on valuations. Piketty also shows (to the small extent that data allow) that the share of global wealth held by a tiny group of billionaires has been rising much more rapidly than average global income.</p><p>What is the policy concern? Piketty writes:</p><blockquote><p>[N]o matter how justified inequalities of wealth may be initially, fortunes can grow and perpetuate themselves beyond all reasonable limits and beyond any possible rational justification in terms of social utility. Entrepreneurs thus tend to turn into rentiers, not only with the passing of generations but even within a single lifetime. . . . [A] person who has good ideas at the age of forty will not necessarily still be having them at ninety, nor are his children sure to have any. Yet the wealth remains.</p></blockquote><p>With this passage he makes a distinction that he previously blurred: between wealth justified by “social utility” and the other kind. It is the old distinction between “profit” and “rent.” But Piketty has removed our ability to use the word “capital” in this normal sense, to refer to the factor input that yields a profit in the “productive” sector, and to distinguish it from the source of income of the “rentier.”</p><p>As for remedy, Piketty’s dramatic call is for a “progressive global tax on capital”—by which he means a wealth tax. Indeed, what could be better suited to an age of inequality (and budget deficits) than a levy on the holdings of the rich, wherever and in whatever form they may be found? But if such a tax fails to discriminate between fortunes that have ongoing “social utility” and those that don’t—a distinction Piketty himself has just drawn—then it may not be the most carefully thought-out idea.</p><p>In any case, as Piketty admits, this proposal is “utopian.” To begin with, in a world where only a few countries accurately measure high incomes, it would require an entirely new tax base, a worldwide Domesday Book recording an annual measure of everyone’s personal net worth. That is beyond the abilities of even the NSA. And if the proposal is utopian, which is a synonym for futile, then why make it? Why spend an entire chapter on it—unless perhaps to incite the naive?</p><p>Piketty’s further policy views come in two chapters to which the reader is bound to arrive, after almost five hundred pages, a bit worn out. These reveal him to be neither radical nor neoliberal, nor even distinctively European. Despite having made some disparaging remarks early on about the savagery of the United States, it turns out that Thomas Piketty is a garden-variety social welfare democrat in the mold, largely, of the American New Deal.</p><p>How did the New Deal tackle the fortress of privilege that was the early twentieth-century United States? First, it built a system of social protections, including Social Security, the minimum wage, fair labor standards, conservation, public jobs, and public works, none of which had existed before. And the New Dealers regulated the banks, refinanced mortgages, and subdued corporate power. They built wealth shared in common by the community as a counterweight to private assets.</p><p>Another part of the New Deal (mainly in its later phase) was taxation. With war coming, Roosevelt imposed high progressive marginal tax rates, especially on unearned income from capital ownership. The effect was to discourage high corporate pay. Big business retained earnings, built factories and (after the war) skyscrapers, and did not dilute its shares by handing them out to insiders.</p><p>Piketty devotes only a few pages to the welfare state. He says very little about public goods. His focus remains taxes. For the United States, he urges a return to top <em>national</em> rates of 80 percent on annual incomes over $500,000 or $1,000,000. This may be his most popular idea in U.S. liberal circles nostalgic for the glory years. And to be sure, the old system of high marginal tax rates was effective in its time.</p><p>But would it work to go back to that system now? Alas, it would not. By the 1960s and ’70s, those top marginal tax rates were loophole-ridden. Corporate chiefs could compensate for low salaries with big perks. The rates were hated most by the small numbers who earned large sums with (mostly) honest work and had to pay them: sports stars, movie actors, performers, marquee authors, and so forth. The sensible point of the Tax Reform Act of 1986 was to simplify matters by imposing lower rates on a much broader base of taxable income. Raising rates again would not produce (as Piketty correctly states) a new generation of tax exiles. The reason is that it would be too easy to evade the rates, with tricks unavailable to the unglobalized plutocrats of two generations back. Anyone familiar with international tax avoidance schemes like the “Double Irish Dutch Sandwich” will know the drill.</p><p>If the heart of the problem is a rate of return on private assets that is too high, the better solution is to lower that rate of return. How? Raise minimum wages! That lowers the return on capital that relies on low-wage labor. Support unions! Tax corporate profits and personal capital gains, including dividends! Lower the interest rate actually required of businesses! Do this by creating new public and cooperative lenders to replace today’s zombie mega-banks. And if one is concerned about the monopoly rights granted by law and trade agreements to Big Pharma, Big Media, lawyers, doctors, and so forth, there is always the possibility (as Dean Baker reminds us) of introducing more competition.</p><p>Finally, there is the estate and gift tax—a jewel of the Progressive era. This Piketty rightly favors, but for the wrong reason. The main point of the estate tax is not to raise revenue, nor even to slow the creation of outsized fortunes <em>per se</em>; the tax does not interfere with creativity or creative destruction. The key point is to block the formation of dynasties. And the great virtue of this tax, as applied in the United States, is the culture of conspicuous philanthropy that it fosters, recycling big wealth to universities, hospitals, churches, theaters, libraries, museums, and small magazines.</p><p>These are the nonprofits that create about 8 percent of U.S. jobs, and whose services enhance the living standards of the whole population. Obviously the tax that fuels this philanthropy is today much eroded; dynasty is a huge political problem. But unlike the capital levy, the estate tax remains viable, in principle, because it requires that wealth be appraised only once, on the demise of the holder. Much more could be done if the law were tightened up, with a high threshold, a high rate, no loopholes, and less use of funds for nefarious politics, including efforts to destroy the estate tax.</p><p>In sum, <em>Capital in the Twenty-First Century</em> is a weighty book, replete with good information on the flows of income, transfers of wealth, and the distribution of financial resources in some of the world’s wealthiest countries. Piketty rightly argues, from the beginning, that good economics must begin—or at least include—a meticulous examination of the facts. Yet he does not provide a very sound guide to policy. And despite its great ambitions, his book is not the accomplished work of high theory that its title, length, and reception (so far) suggest.</p> Mon, 21 Apr 2014 05:20:00 -0700James K. Galbraith , Dissent Magazine983834 at http://www.alternet.orgEconomyEconomyadam smithamericaBranko MilanovibrazilbusinesscambridgecanadaChinaClaudia Goldindean bakereconomic inequalityeconomicseuropefrancegermanyincome distributionIncome inequality metricsincome taxindiaindonesiaintelinternal revenue serviceJapanJoan Robinsonkarl marxkoreaLawrence KatzLuigi PasinettimassachusettsmicrosoftoecdOracleParis School of EconomicsPerson CareerPiero Sraffapresidentprogressive taxQuotationreaganrooseveltSimon KuznetsSocioeconomicssouth africaswedenthomas fergusonThomas PikettyTravis HaleUSDUnderunited kingdomunited stateswealth concentrationWealth taxWelfare economicscapital equipmentcontinental Europeexecutivefundamental lawgood tax systemsmachinerymarginal productsneoclassical model of economic growthoilphysical capital equipmentprofessorsocial insurancetax lawtax systemstechnology firmsthe progressivethe World Economic ReviewJames K. Galbraith: How to Stop the Path of Economic and Social Destructionhttp://www.alternet.org/economy/galbraith-and-economic-destruction
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<div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">The verdict is in: austerity economics is a global loser.</div></div></div><!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers -->
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<!--smart_paging_autop_filter--> <p><em>Economist James K. Galbraith recently <a href="http://yanisvaroufakis.eu/2013/06/15/james-galbraith-on-ert-the-fight-for-greek-democracy-and-the-euro-crisis/">addressed</a> an audience in Greece to examine why members of his profession have done such a poor job of diagnosing economic problems and recommending appropriate policy solutions. As he explains, economists dedicated to an outdated model of how the economy functions have promoted national policies focused on austerity, deregulation and privatization, which have failed miserably to address the widespread pain of a global financial crisis. In contrast, economists critical of this view have strongly opposed austerity and have recommend policies that can create a robust economy and society through stabilizing institutions, addressing the burden of debt, restructuring banks, and promoting investment and jobs. Which side has been proven right? The answer, Galbraith argues, is obvious, and it is time for a sea change in economic thinking.</em></p><p>In the wake of a brutal crisis that has now lasted five years, even economists ought to reconsider their ideas. Most other people would do so much more quickly, but we are a very patient and stubborn profession.</p><p>The view that was propagated at the time of the crisis was that there was a series of national problems: in the U.S., the subprime mortgage disaster; in Greece, overspending, undertaxing; in Ireland, commercial real estate; in Spain, a residential housing bubble. And somehow, all of these things seemed to come to a head and break out in a crisis at the same time. What a coincidence!</p><p>In this view, the crisis was to be corrected by national policies at national scale by the actions of national governments. What policies? Well, the policies were to be the policies they were told to adopt, which in every case were approximately the same: Cut your public sector, raise your taxes, deregulate your markets, privatize, privatize, privatize — that is the new Moses, as is profits.</p><p>But while the policy was interpreted by authority, the judgment would be rendered by markets. Good behavior, effective action, would bring back confidence. You must have heard this a thousand times: Confidence would mean interest rates would fall and the credit markets would open. That was the sequence of events. And when that didn’t happen, well there was always an explanation, which was “an inadequate degree of zeal.” </p><p>The failure of the policy could always be remedied by making the policy even more harsh. This is the attitude of the gambler who loses every hand he plays and comes back and doubles his bet. This is what we’re seeing. You can keep that game going for quite some time. You may perhaps be familiar with a phrase attributed to Albert Einstein, which is that insanity consists in always doing the same thing and expecting a different result.</p><p>Now, from the beginning, there was a different view. It wasn’t very widely held, but it existed. This view held that the central fact of the crisis was the worldwide collapse of a model of growth fueled by private credit markets. It seemed obvious that this was the case. How could it not be? Everything happened at once. Yes, the collapse originated with the debacle of the U.S. mortgage markets, whose losses had been spread all through Europe by the sale of toxic securities to pension funds and townships and private investors and banks. And Europe and the U.S. are the same investment community. They react the same way when they see a disaster, which is they run for safety. So of course they sold all the weak assets – the sovereign credits of the small countries, and bought the sovereign debts of the big countries. And the interest rates go up on one and down on the other. It’s as obvious as anything in front of you eyes. Did the interest rates on U.S. debt go up because the U.S. had a mortgage crisis? No, they went down. It was a massive, worldwide flight to safety. </p><p>Now, in Europe, this was especially aggravated by institutions that were inadequate to the purpose, that had been badly designed, in many ways, by my generation of economists 30 years ago in a moment when certain ideas were in fashion that held that, well, you know, the principles that everything would be all right if the central bank simply controlled inflation, and all budgets were balanced, and all markets were private. We’ve had a set of ideas which for a decade had been receding around the world — abandoned in Latin America, never adopted in Asia — but still intensely held and advanced by those who had become committed to them many years ago.</p><p>On top of that, we’ve had an attitude toward policy which was basically the mentality of a debt collection agency, a mentality of punishment of debtors and reward for creditors that fails to recognize the elementary truth that you can’t have one without the other, that every surplus has a deficit corresponding. So this alternative idea that this was the problem — a worldwide collapse of private credit met by inadequate institutions and hidebound ideas — existed. And five years have gone by, and we can ask: Which interpretation hold up better? We have cases we can look at. </p><p>And in particular — and I’m not one to be a booster of the American experience — but we can compare the U.S. and Europe, and we can see that in the U.S., although there are many problems that remain — unemployment, foreclosures, stagnation — the situation is fundamentally stable. It stabilized some time ago, whereas in Europe it has not. The crisis just gets deeper and deeper. Why is that? It is not because the U.S. instituted and followed a policy of rigorous austerity. It is precisely because we did not.</p><p>Yes, we had an expansion package initially in 2009, and that was important. But it was not the fundamental thing. The fundamental thing was that there exists in the U.S. stabilizing institutions that continued to function, that buffered the enormous losses that people suffered in the crisis. What were those institutions? Yes, we propped up the banks, and I’m not particularly proud of that. But that wasn’t the important thing. One of the most important things was that the social insurance mechanisms worked. Social security payments went up. Unemployment insurance applied across the whole country. The health insurance programs, which only apply to part of the population, but nevertheless an important part, continued to function. Disability payments picked up part of the people who had lost their jobs. Food stamps — a very important program — was expanded to cover about 70 million Americans, a very large share of the population.</p><p>And all of these things meant that while losses were felt, they were not catastrophic to society. And there’s one other thing almost equally important, and that has to do with debts. It’s just a question of a difference of circumstance. In the U.S., the debts that were at the root of the crisis were primarily household debts. They were mortgage debts, credit card debts — but especially mortgage debts. And with a mortgage debt, over time, one of two things is going to happen. It will be paid, or it will default. Defaulting is a very hard thing, but it gets rid of the debt, and so the debt burden goes down over time. That’s not the case in Europe. The problem is public debt, sovereign debts. And they are perpetual until they are renegotiated — or repudiated, but that, again is a drastic measure. The resolution, in other words, has to be an active, and not a passive process. It’s plain as day.</p><p>What are the implications? There must be a European solution, and it must begin with an assessment and a change of ideas. That’s the most important thing. When ideas change, everything else will follow. Policies will follow, and, as needed, institutions will follow after that. Many things could be done under current treaty framework. What are those things?</p><p>1. First of all, mutualize the debts and reduce the burden so that we are not working under the pretense that debts that cannot be paid will be paid. They won’t be paid. If the burden of those debts is reduced and they are effectively made the common responsibility of the European community, then they become manageable. Without that, the losses are there in any event.</p><p>2. Second part, restructuring the banks. We have to recognize that the model of growth that relied principally on the financial system to generate credit is gone, and it’s not coming back. Having large banking institutions that persist unchanged — what is the point? What purpose do they serve? What social function justifies their charters? If we have a smaller financial sector, then we have a larger employment sector. If the profits are not being drained to the big bankers, they can go to the small businesses. Why is that not a reasonable policy change both in the U.S. and Europe?</p><p>3. Third point, release funding for investment and jobs. The mechanisms have been outlined very effectively: Using existing institutions to begin a process of reconstruction and reemployment. Institutions at the continental level can do things that institutions at the national level cannot do.</p><p>4. And then there is a fourth point, which, to my mind, becomes increasingly pressing at time goes on. It’s a point which really speaks to the question of whether Europe means anything, as it would speak to the question of whether America means anything. If fact, it did speak to the question of whether America meant anything in the 1930s, when we also faced a crisis that threatened national economic and political existence. Let us recognize that our most pressing task is not to restore economic growth. It’s not to bring us back to some past level of prosperity. We’re very far beyond that. We are facing the threat of dissolution of great nations and social communities. It is an urgent matter to prevent that from happening.</p><p>Stabilization, therefore, of society, and stabilization of the human condition have a very important role to play in what me must do. That means stabilizing people’s pensions. Stabilizing unemployment insurance. Stabilizing the basic services —education and healthcare. Adequately insuring bank deposits so as to prevent the cataclysm of an uncontrollable run and shutdown of the payment system. These are things we do for each other, mainly with a device that’s called insurance: social insurance, deposit insurance, health insurance, unemployment insurance. And when we extend that to the whole community — and by this I mean the European community or the American community — we bring our populations together and stop processes that are driving us apart.</p><p>It’s seems to me that the objective to articulate is really a very simple one for the time being: It is to stop the path of destruction, to stabilize, to quell panic, to defeat violence, to buy time, frankly — not to solve all problems at once — but to buy time so as to effectively open up the possibility for a new politics based on principles that are not foreign in Europe, but that have been forgotten and submerged in recent years: the principles of solidarity and the spirit of true and effective democracy.</p><p>If we can do these things, then perhaps we can begin to face together, on a European basis, on a transatlantic basis, on the basis of our joint values and objectives, the very large and challenging problems that we will continue to face once we have turned a corner, changed our ideas, changed our policies, and have brought this crisis, finally, and long last, to an end.</p><p><em>*This speech has been edited and condensed for clarity.</em></p> <!-- iCopyright Interactive Copyright Notice -->
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Thu, 11 Jul 2013 12:17:00 -0700James K. Galbraith , AlterNet867667 at http://www.alternet.orgEconomyEconomyNews & PoliticsWorldAlbert EinsteinamericaasiaEconomic bubblesEconomic historyeconomicseconomistEconomy of the United Stateseuropefinancial crisisfiscal policyfood stampsGovernment debtgreeceInstitutional investorsinsuranceirelandjames k. galbraithLate-2000s financial crisislatin americaPerson CareerPerson LocationQuotationspainsubprime mortgage crisisunemployment insuranceUnited States public debtunited statesappropriate policy solutionsbankbasic servicesdeposit insurancehealth insurance programshealth insurancelarge banking institutionsreal estatesocial insurance mechanismssocial insuranceGalbraith: Is This the End for the Deficit Drones? http://www.alternet.org/economy/galbraith-end-deficit-drones
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<div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">Public opinion is turning on those who seek to cut our social safety net. </div></div></div><!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers -->
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<!--smart_paging_autop_filter--> <p>In wars, sometimes there comes a moment when the tide turns. The collapse of Ludendorff's offensive in 1918 presaged the Armistice; failure in the Ardennes meant the end for Germany in 1944. <br /><br />Today we have two drone wars in a similar state. One is mainly in Pakistan. Built on a gee-whiz technology that can't do what it promised, this war has claimed too many victims for too little effect. It is a diplomatic disaster and its days are numbered, almost surely, for that reason.<br /><br />The other drone war is in Washington. The drones are in groups with names like the Committee for a Responsible Federal Budget and Campaign to Fix the Debt. They drone on, and on, about the calamities that await unless we cut Social Security, Medicare and Medicaid.<br /><br />That the goal of the deficit drones is to cut Social Security, Medicare and Medicaid has been plain for years to anyone who looks at where the money comes from. It comes largely from Peter G. Peterson, a billionaire former secretary of Commerce under Nixon, who is Captain Ahab to Social Security's Moby Dick. And when one trick, such as privatization, falls flat, his minions always have another, whether it's raising the retirement age or changing the COLA. But a cut by any other name is still, and always, just a cut.<br /><br />Peterson's influence is vast; practically the entire DC mind-meld has bought his line to some degree. </p><p>The other day <a href="http://video.cnbc.com/gallery/?play=1&amp;video=3000140848">I was on CNBC</a>, supposedly to discuss the debt ceiling, but the topic was Social Security all the way. My host, Andrew Ross Sorkin, was very blunt: “If now isn't the time to cut entitlements,” he asked, “when would be?” My answer – in a word, never – is not one he seemed to have thought possible before.<br /><br />Yet there is no good reason to cut Social Security, Medicare or Medicaid. These are insurance programs. They keep the elderly, their survivors and dependents, and the disabled, out of dire poverty. We can afford this. There is also no financing problem; if there were, investors would not be buying 20-year US bonds at 3 percent. These days when some economists say that cuts are needed, they say it's only for show – to establish “credibility.” Old-timers may remember, that's what DC insiders once said about the war in Vietnam.<br /><br />And like Vietnam, this war is getting old. We're beginning to realize, we don't need it. If the United States really faced some sort of deficit or debt crisis, something would have happened by now. Simpson and Bowles – those brave men who were going to lead us toward budget balance – who remembers them? The super-committee? The fiscal cliff? All gone. Yet Social Security, Medicare and Medicaid are still here. The economy is still stable. And interest rates are still low. The debt ceiling? On that, the president stood up and the Republicans gave way.<br /><br />It's true that the sequesters and the continuing resolution lie ahead. But if you are going to refuse blackmail over the debt ceiling, why yield to it on anything else? The blackmailers must know by now which side the public will take.<br /><br />And then on Monday we heard from President Obama. As part of his great speech, which settled so many questions, he gave a little economics lesson. Here's what he said:</p><blockquote><p>“The commitments we make to each other — through Medicare, and Medicaid, and Social Security — these things do not sap our initiative; they strengthen us. They do not make us a nation of takers; they free us to take the risks that make this country great.”</p></blockquote><p>This is exactly right. Social Security, Medicare and Medicaid are not merely a transfer from the young. They are part of the fabric of our lives. They free us all – every single one of us, young and old – to be less worried, less fearful, a bit more independent, and a little less cautious than otherwise. Certainly old people are better off when they have a regular income and health insurance. But working people are also better off, directly and indirectly, every day.<br /><br />There are some, like Mr. Peterson and his allies, who don't like this. Their motives are plain. But now the president seems to have made his choice. The word he used was “commitment.” Again, exactly so. That's what Social Security, Medicare and Medicaid are. President Obama took a great step, when he said so.<br /><br />Now it's time for Congress to stand with him, to say no to blackmail, no to fake fixes, no to disguised cuts, no to fear -- and no to those deficit drones. </p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers -->
<div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter--><p>James K. Galbraith is the author of “Inequality and Instability: A study of the world economy just before the Great Crisis.” He teaches at the University of Texas at Austin.</p> </div></div></div><!-- iCopyright Interactive Copyright Notice -->
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Wed, 23 Jan 2013 06:32:00 -0800James K. Galbraith , AlterNet781776 at http://www.alternet.orgEconomyEconomyNews & PoliticsHard Times USAandrew ross sorkinbarack obamacaptainCommittee for a Responsible Federal Budget and the CampaigncongressDeficit reduction in the United StatesFederal assistance in the United StatesgermanygovernmentHealthcare reform in the United StatesmedicaidmedicareobamapakistanPerson Careerpeter g. petersonPresidency of Lyndon B. JohnsonpresidentQuotationsocial issuessocial securityUnited States debt-ceiling crisisUnited States federal budgetunited statesvietnamwashingtongee-whiz technologyhealth insuranceinsurance programssecretary of commerce6 Reasons the Fiscal Cliff is a Scamhttp://www.alternet.org/economy/6-reasons-fiscal-cliff-scam
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<div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">The so-called &quot;fiscal cliff&quot; is a mechanism for rolling back Social Security, Medicare and Medicaid.</div></div></div><!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers -->
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<!--smart_paging_autop_filter--> <p>Stripped to essentials, the fiscal cliff is a device constructed to force a rollback of Social Security, Medicare and Medicaid, as the price of avoiding tax increases and disruptive cuts in federal civilian programs and in the military. It was policy-making by hostage-taking, timed for the lame duck session, a contrived crisis, the plain idea now unfolding was to force a stampede.</p>
<p>In the nature of stampedes arguments become confused; panic flows from fear, when multiple forces – economic and political in this instance – all appear to push the same way. It is therefore useful to sort through those forces, breaking them down into separate questions, and to ask whether any of them justify the voices of doom.</p>
<p>First, is there a looming crisis of debt or deficits, such that sacrifices in general are necessary? No, there is not. Not in the short run – as almost everyone agrees. But also: not in the long run. What we have are computer projections, based on arbitrary – and in fact capricious – assumptions. But even the computer projections no longer show much of a crisis. CBO has adjusted its interest rate forecast, and even under its “alternative fiscal scenario” the debt/GDP ratio now stabilizes after a few years.</p>
<p>Second, is there a looming crisis of Social Security, Medicare and Medicaid, such that these programs must be reformed? No, there is not. Social insurance programs are not businesses. They are not required to make a profit; they need not be funded from any particular stream of tax revenues over any particular time horizon. Reasonable control of health care costs – public and private – is necessary and also sufficient to keep the costs of Medicare and Medicaid within bounds.</p>
<p>Third, would the military sequestration programmed to start in January be a disaster? No, it would not be. Military spending is set in any event to decline – and it should decline as we adjust our military programs to our national security needs. The sequester is at worst harmless; at best it's an invitation to speed the process of moving away from a Cold War force structure to one suited to the modern world.</p>
<p>Fourth, would the upper-end tax increases programmed to take effect in January be a disaster? No, they would not be. There is no evidence that the low tax rates on the wealthy encourage them to spend or invest, no evidence that higher tax rates would deter the spending and investment that they might otherwise do.</p>
<p>Fifth, would the middle-class tax increases, end of unemployment insurance and the abrupt end of the payroll tax holiday programmed for the end of January risk cutting into the main lines of consumer spending, business profits and economic growth? Yes, over time it would. But the effects in the first few weeks will be minimal, and Congress could act on these matters separately, with a clean bill either before the end of the year or early in the new one.</p>
<p>Sixth, what about all the other cuts in discretionary federal spending? Yes, some of these would be very damaging if allowed. Simple solution: don't allow them.</p>
<p>In short, Members of Congress: if you can, just pass the President's bill on middle-class taxes, and, if you can, eliminate the domestic sequester. Then, please go home. Enjoy the holidays. Come back in January prepared to extend unemployment insurance, to phase out the payroll tax holiday gradually, to restore stable funding to necessary programs and to start dealing with our real problems: jobs, foreclosures, infrastructure and climate change.</p> <!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers -->
<div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter--><p>James K. Galbraith is the author of <em><a href="http://predatorstate.com/">The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too</a></em>, and of a new preface to <em>The Great Crash, 1929</em>, by John Kenneth Galbraith. He teaches at the University of Texas at Austin.</p> </div></div></div><!-- iCopyright Interactive Copyright Notice -->
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Thu, 22 Nov 2012 08:53:00 -0800James K. Galbraith , AlterNet748893 at http://www.alternet.orgEconomyEconomyNews & Politicsbusinesscongresseconomic policyEconomy of the United StatesFederal assistance in the United StatesgovernmentHealthcare reform in the United Statesmedicaidmedicarepayroll taxPresidency of Lyndon B. Johnsonpresidentsocial issuessocial securitytaxTaxation in the United Statesinsurance programsunemployment insuranceEconomic Recovery: Here's What We Should Do Nexthttp://www.alternet.org/story/127331/economic_recovery%3A_here%27s_what_we_should_do_next
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<div class="field field-name-field-teaser field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even">A look at where we should go from here.</div></div></div><!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers -->
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<!--smart_paging_autop_filter--><p>The compromises necessary to pass the recovery bill in the Senate damaged it in several ways. The overall size of the package was reduced, evidently for the cosmetic purpose of keeping the top-line number below $800 billion. And funds urgently needed to stabilize state and local governments and for construction were cut back, along with the credit against the payroll tax â€“ evidently to make room for a rollback of the alternative minimum tax, a step with a strong political constituency but a weak economic rationale.</p>
<p>In my local paper Thursday morning, I read of $20 million that will be cut from our city budget next year, including a day labor center, public library hours, and overtime for the police force. Cuts like that â€“ and in many places they are far deeper than here â€“ are going on everywhere, and the bill as passed will help but it will not stop them. Contrary to Grover Norquist's comment <a href="http://economy.nationaljournal.com/2009/02/next-steps-on-the-economy.php#1283918">in this space</a>, police, libraries and day labor are part of the productive economy, as much as anything else.</p>
<p>It is difficult to know what the so-called moderate Senators were thinking. Do they have special insight into this crisis? Do they have their own forecasters, with deep understanding and good track records in these matters? Do they have their own models? Do they have, in other words, any ground for believing that less than $800 billion, spread over two years, will be enough to bring the economy back? If so, they weren't saying so, so far as I could tell. </p><!-- All divs have been put onto one line because of whitespace issues when rendered inline in browsers -->
<div class="field field-name-field-bio field-type-text-long field-label-hidden"><div class="field-items"><div class="field-item even"> <!--smart_paging_autop_filter--> </div></div></div>Tue, 17 Feb 2009 04:47:01 -0800James K. Galbraith , Firedoglake653651 at http://www.alternet.orgPEEKPEEKCorporate Accountability and WorkPlaceOld_Blog Type Contentcongresshousesenatestimuluseconomic recoverywhere to go from here